FED finally admits we're in for a correction. Thoughts?

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FED finally admits we're in for a correction. Thoughts?

Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

https://www.ksl.com/article/50...

I'm no smarter than the next guy and nobody knows the future. But my common sense tells me you can't increase housing prices 50% or more in two years and expect them to stay there. I predict we'll see prices drop 20-25% from their peak in many markets.

Thoughts?

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Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
4y

Can we stop just throwing out ridiculous numbers out there? Can we use some perspective and do away with the hyperbole.

20-25% drop in prices would be a range that is slightly worse than the housing collapse 15 years ago to dramatically worse....as that drop was 19% from peak quarter to bottom quarter. If we measured the yearly averages instead of quarterly peak and trough, it was a 10% drop. That 19%/10% drop nearly destroyed the world economy and nearly sent us into a 2nd Great Depression. So saying 20-25% is suggesting something even much worse that what happened from 2007-2011.

So you're saying with your prediction that we are basically going to be entering the next Great Depression. 

Or what is more likely? What are the current risks in the economy right now? Is deflation a force we are currently fighting?....or are we in a high inflationary environment from the 50% increase in the money supply since the Spring of 2020.

What happened the last time we had such a big increase in the money supply which occurred under the Nixon administration? High inflation...just like we are experiencing now. The loose monetary policy in 2018 and 2019 was predictably going to lead to this...then the 2020 money supply increase threw gasoline onto the already burning fire.

So after the same thing happened in the 1970s after home prices rose 200% in just a few years under these conditions, what happened next? They rose another 100% in a couple years, til the rate finally slowed to 10% rises per year in the 3 year run up and following peak interest rates. Think about that, at the highest interest rates ever recorded, the yearly rise in home prices, after slowing substantially, are in line with the rise in the last 3 years. What we are saying is an unsustainable rise in prices, would have been the slowest rise in prices during the 70s to early 80s high interest rate/high inflationary envorment.

Inflation is a pretty easy concept when you dont try to complicate it.

“Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” - Milton Friedman

Inflation isn't going to reverse itself. It can be tamed, but the clock doesnt turn backwards. For the last 122 years there has been 1 force that forces prices on real estate down in any significant amounts...and that is a lack of availability of credit/debt. It happened in the Great Depression when banks were failing left and right. It happened during the Savings and Loan Crisis 60 years later when all the S&Ls failed. Then it happened during the Financial Crisis 20 years after that, again when the banking system was collapsing. Unless there is an unknown banking crisis on the horizon, it's just wishful thinking by investors hoping prices drop so they can buy more and PTSD from the Financial Crisis, which is just recentcy bias.

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  • Greg ScottPro Member
    Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
    4y
    The retiree can thank Washington DC for hurting their retirement, due to high inflation.
    The person working minimum wage can thank Washington DC for dramatically devaluing their quality of living due to high inflation.
    Now the Middle Class and Upper Class, who experienced gains from asset inflation, will get to feel some pain
    I'm not sure anyone wins with these sorts of economic swings, except maybe the politicians
    16Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    4y

    I don't normally comment on this stuff,  but duh.  Any asset or commodity that has screamed up in value so much above historical norms for a 2 year period will tend to revert back to its norm. It's probably called the rubber band effect or something.

    As most know, I 93% exited with plans to sell my remaining handful of easies to specific prior /current renters over the next 24 months.  I will sell those on fair contracts as well if rates are cumbersome for these worthy first time buyers.

    So personally I'm investing in popcorn and watching the show but chairman Powell isn't really releasing breaking news, they just rarely admit overcast news. 

    Underwrite to your specific deal and let the numbers drive your decisions.  The devaluation will be for average buyers.  Be a sophisticated investor.  

    16Reply
  • Larry Turowski
    Flipper/Rehabber · Rochester, NY · Member since 2014 · 1k+ posts · 1k+ votes
    4y

    @Nathan Gesner You could be correct on the low end. But I doubt it will drop that much. Median home prices have gone up about 19% since the beginning of 2021 (https://fred.stlouisfed.org/series/MSPUS). Price has been established for too long and people value what they own too high to sell below that early 2001 level (endowment effect). Owners are not unable to pay, as in 2008. Inflation will account for a good chunk of the price increases. I'd be surprised to see prices drop more than 7% and that will be temporary.

    What will happen is sales will slow down. New buyers who are entering the market will either have to adjust their expectations of what they can afford due to higher monthly payments or wait until they can afford more. Flippers will have to put their houses in showcase condition to stand out in a pickier market.

    13Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y

    I'm not that smart either, but I've always been pretty close with my gut hunches about this kinda stuff. I see prices correcting by 20-30%.....

    I could be wrong though, I was once....

    5Reply
  • Austin F.
    Investor · MI · Member since 2015 · 227 posts · 478 votes
    4y

    I think we're in for a bumpy 2 or more years. Can't repress interest rates and shove money into the economy for that long and not get this on the other side.

    The bad investors will get flushed out, and the good ones will hang on and come out the other side with a few more grey hairs. Buckle up. 

    10Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y
    Quote from @Austin F.:

    I think we're in for a bumpy 2 or more years. Can't repress interest rates and shove money into the economy for that long and not get this on the other side.

    The bad investors will get flushed out, and the good ones will hang on and come out the other side with a few more grey hairs. Buckle up. 


     Yessir! Good analysis. Get ready to buy, that's what I'm doing.....

    7Reply
  • Eric Bilderback
    Real Estate Agent · Sisters, OR · Member since 2014 · 1k+ posts · 1k+ votes
    4y

    Well I am glad to see we have so many humble men on this thread.  You are all in luck as I happen to be brilliant!  I have been calling for a recession for 10 years or so, so why stop now?  In my defense I think the opted to kick the can down the road which was a tragedy that will hurt many good people, and morally I think they have a lot to answer for.  It is high time that we go through the economic destruction that is necessary to get out of this artificial economy.  

    15Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y
    Quote from @Eric Bilderback:

     It is high time that we go through the economic destruction that is necessary to get out of this artificial economy.  

    I agree. and have said on another thread that an economic collapse may be necessary and even desired.

    TPTB can, and will, just keep printing and throwing money at this, increasing inflation and then creating recessions, even depression. Over and over, and on and on.

    An economy is much like a law of nature with it's own life that cannot be controlled by mankind.

    So here comes this collapse......I wonder what it will take to trigger the final collapse and when it will be? Maybe we skate one more time?
    2Reply
  • Kyle S.
    Member since 2022 · 64 posts · 35 votes
    4y

    Aren't we already down 5-8% in some markets, ie. San Fran, Boise, Sacramento, Austin and Pheonix? I don't see how some of these specific markets are done going down with interest rates going up and in most of those previously hot markets the inventory going up as well. Doing my own research, I came up with Arizona going up 12.42% in their inventory in the past month alone (8-23 to 9-23).  

    I'm in Las Vegas and this market seems to be a mess. The inventory is moving up fast. I've been looking at a specific price point for almost 6 months and the home I could buy at that price point is drastically different now than what I could buy even 3-4 months ago. It's a much nicer home now. 

    To me it's pretty straightforward that some markets like mentioned above are about to get hammered. 

    2Reply
  • Eric Bilderback
    Real Estate Agent · Sisters, OR · Member since 2014 · 1k+ posts · 1k+ votes
    4y
    Quote from @Bruce Woodruff:
    Quote from @Eric Bilderback:

     It is high time that we go through the economic destruction that is necessary to get out of this artificial economy.  

    I agree. and have said on another thread that an economic collapse may be necessary and even desired.

    TPTB can, and will, just keep printing and throwing money at this, increasing inflation and then creating recessions, even depression. Over and over, and on and on.

    An economy is much like a law of nature with it's own life that cannot be controlled by mankind.

    So here comes this collapse......I wonder what it will take to trigger the final collapse and when it will be? Maybe we skate one more time?

     The real collapse in standard of living is when the dollar loses its status as the worlds reserve currency.  At least thats my bet.

    7Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y
    Quote from @Eric Bilderback:
    Quote from @Bruce Woodruff:
    Quote from @Eric Bilderback:

     It is high time that we go through the economic destruction that is necessary to get out of this artificial economy.  

    I agree. and have said on another thread that an economic collapse may be necessary and even desired.

    TPTB can, and will, just keep printing and throwing money at this, increasing inflation and then creating recessions, even depression. Over and over, and on and on.

    An economy is much like a law of nature with it's own life that cannot be controlled by mankind.

    So here comes this collapse......I wonder what it will take to trigger the final collapse and when it will be? Maybe we skate one more time?

     The real collapse in standard of living is when the dollar loses its status as the worlds reserve currency.  At least thats my bet.


     Well that would be interesting now wouldn't it?

    1Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    4y

    Can we stop just throwing out ridiculous numbers out there? Can we use some perspective and do away with the hyperbole.

    20-25% drop in prices would be a range that is slightly worse than the housing collapse 15 years ago to dramatically worse....as that drop was 19% from peak quarter to bottom quarter. If we measured the yearly averages instead of quarterly peak and trough, it was a 10% drop. That 19%/10% drop nearly destroyed the world economy and nearly sent us into a 2nd Great Depression. So saying 20-25% is suggesting something even much worse that what happened from 2007-2011.

    So you're saying with your prediction that we are basically going to be entering the next Great Depression. 

    Or what is more likely? What are the current risks in the economy right now? Is deflation a force we are currently fighting?....or are we in a high inflationary environment from the 50% increase in the money supply since the Spring of 2020.

    What happened the last time we had such a big increase in the money supply which occurred under the Nixon administration? High inflation...just like we are experiencing now. The loose monetary policy in 2018 and 2019 was predictably going to lead to this...then the 2020 money supply increase threw gasoline onto the already burning fire.

    So after the same thing happened in the 1970s after home prices rose 200% in just a few years under these conditions, what happened next? They rose another 100% in a couple years, til the rate finally slowed to 10% rises per year in the 3 year run up and following peak interest rates. Think about that, at the highest interest rates ever recorded, the yearly rise in home prices, after slowing substantially, are in line with the rise in the last 3 years. What we are saying is an unsustainable rise in prices, would have been the slowest rise in prices during the 70s to early 80s high interest rate/high inflationary envorment.

    Inflation is a pretty easy concept when you dont try to complicate it.

    “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” - Milton Friedman

    Inflation isn't going to reverse itself. It can be tamed, but the clock doesnt turn backwards. For the last 122 years there has been 1 force that forces prices on real estate down in any significant amounts...and that is a lack of availability of credit/debt. It happened in the Great Depression when banks were failing left and right. It happened during the Savings and Loan Crisis 60 years later when all the S&Ls failed. Then it happened during the Financial Crisis 20 years after that, again when the banking system was collapsing. Unless there is an unknown banking crisis on the horizon, it's just wishful thinking by investors hoping prices drop so they can buy more and PTSD from the Financial Crisis, which is just recentcy bias.

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    59Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y

    Thanks @Russell Brazil, good info.

    I still see many market dropping by that amount. Ours is well on the way, definitely over 10% already. Other areas are following suit. I'm interested in reality numbers that affect me....

    0Reply
  • Chris John
    Member since 2020 · 671 posts · 937 votes
    4y

    Speaking only as a real estate investor, I don't really care if housing prices drop.  I love appreciation, but demand cash flow.  A declining or sideways market will just mean that we don't keep refinancing and keep buying more like we have the past few years.

    If there is a drop and it's small, we'll use our cash flow money to buy mutual funds.  If the drop is dramatic like 2008, we'll buy more houses with it.  Either way is fine.

    Speaking as an American, my feelings are more complicated.  I hate to see people suffer, but I also believe that people deserve what they vote for...

    16Reply
  • Dan DiFilippoBusiness Member
    Real Estate Broker · Fayetteville, NC · Member since 2020 · 251 posts · 244 votes
    4y

    @Nathan G. All indicators are suggesting rates will be going back down, so that will support the housing market.

    It's a big ship and it doesn't turn on a dime. And it's important to keep in mind that don't nearly have the same instability in housing as we did fifteen years ago. I see it'd be more likely that we'd have a sustained period (5-7 years) of steady or slightly declining prices.

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  • Eric Tullius
    Real Estate Agent · Philadelphia, PA · Member since 2022 · 58 posts · 40 votes
    4y

    Never in history has a landlord called a tenant and said they are going to lower their rent due to a recession. The economy will always correct itself, but historic drops and collapses have come and gone. Real Estate has survived because no matter what people will always need a place to live. I know this is neanderthal speak compared to numbers and statistics, but it has been and will continue to be the case going forward. 

    6Reply
  • Nick Coons
    Investor · Tempe, AZ · Member since 2019 · 104 posts · 66 votes
    4y

    Here in the Phoenix area, the properties that saw the biggest uptick, primarily the ones that were more expensive to begin with ($700k+) are the ones that are seeing the biggest drop. Properties on the lower end (<$400k) haven't taken much of a hit and are already starting to recover.

    Here's my thinking that explains this. Someone looking to purchase a more expensive house probably already owns a house with a mortgage and is not a first-time home buyer. This person is comparing their current amazing interest rate to the interest rate they would get on a new loan, and are seeing that it's not worth it. Someone looking to buy a property on the lower end is probably a first-time home buyer. It doesn't matter if the current mortgage rates are 2% or 12%, they're comparing their monthly mortgage payments to their monthly rent payment. If they can save money monthly by buying a house, or come in roughly the same, then they're looking to buy.

    That's obviously quite the simplification, but I think it makes sense.

    13Reply
  • Michael Brattelli
    Real Estate Broker · Medford, NJ · Member since 2018 · 236 posts · 177 votes
    4y

    @Russell Brazil always preaching facts and hard numbers not hypotheticals. Nice post

    7Reply
  • Nicholas L.Pro Member
    Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
    4y

    @Russell Brazil

    great post.

    @Nick Coons

    totally agree.  all the online clickbait about huge reductions is in higher priced homes.  multimillion dollar properties that are being listed for 4x what they were bought for 12 years ago, are experiencing large reductions.  so what?

    @Nathan Gesner

    it's a good question.  i don't know.  in my market (Pittsburgh) if something high quality hits the market at a reasonable price it is still snapped up within a few days.  not quite as crazy as last year but still very strong demand.  the listings that are sitting are either higher end, or, as @Larry Turowski points out, very aspirational flips.

    BUT, if interest rates continue to climb it seems that it will have to put pressure on buyers.  i'm just still not seeing it and i don't know how many more increases it will take.

    2Reply
  • Jordan MoorheadBusiness Member
    Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
    4y

    I have no real idea what's going to happen but I have tightened up my buying criteria

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  • Eliott Elias
    Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
    4y

    We're seeing the early glimpses in Austin. I have a listing in a super desirable neighborhood, been listed for 2 weeks and not a single call. 

    2Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    4y

    Hard to believe but that's the actual plan (squash demand, eliminate jobs, shrink the economy, recessionary policy).  We are not working on getting more materials, workers, and energy into the country to actually fight inflation.  Nope.  We are a one trick pony with only one dude needed to execute the strategy...while the rest of the government and citizens sit around and wait for the outcome.  We are like outdoor animals at the mercy of the weather.  We are not fighting inflation...we are surrendering to it.  We are beating the crap out of the economy so we can shrink to greatness.

    18Reply
  • Johnny Drago
    Member since 2022 · 26 posts · 14 votes
    4y

    cost of goods won't go down. Wages are going to go up. Millennials are in the middle of their 1st time home buying era. People aren't going to be inclined selling a home at a low interest rate to move to another house with a higher rate.  Certain locations will have a softer pullback compared to others. I think it's pretty obvious what those locations are. It's a bummer to those looking to sell in the next two years but once inflation cools off and the fed cuts rates again, it's going to be pretty hectic.

    It's the bubble markets that would concern me the most. And those are the markets with the most homes being bought by investment companies lol.

    0Reply
  • Dan Schwartz
    Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
    4y

    @Mike Dymski what are some other ways to fight inflation besides deflationary measures?

    0Reply
  • Adam Martin
    Rental Property Investor · Member since 2020 · 1k+ posts · 1k+ votes
    4y

    I've been reading a lot of these articles lately and still have to admit I just don't see it happening at least in my market or the housing market as a whole.  Yes housing prices increased rapidly and when interest rates stopped being manipulated to be artificially low this had a negative effect on the housing market.  We are going to see a slowdown in refinances and it is harder to justify selling to either upgrade and afford something better or downsize to a smaller house with a similar payment since interest rates are up.  I hear a lot that people won't be able to afford to buy but I see it another way.  There are still buyers out there and while we don't see 15 people bidding on 1 house each time one comes up really it only takes one buyer.  People may just have to make compromises in what they buy.  I see it as a ladder system where buyers just go down a rung.  Instead of buying that 400k house you love that is a 4/4 with a finished basement a buyer may now be looking to settle at 325-350k and have to forego the finished basement and fenced yard or they may have to settle on a less expensive location a little further out of town.  Either way they are still buying and still have the same payment it is just they are swimming in a different lane.  The losers in this are on the poles.  If you are selling higher end real estate I can see these higher drops and if you are trying to buy in the lower end I can see you priced out but the middle is still there just moving. It is getting harder to find deals as interest rates are going up so I have some cash in reserve and wouldn't be mad if a few of you all were right but honestly I just don't see it on a large scale. 

    2Reply
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